Environment Auditing: PESTEL Analysis

BTECH HND/BS
WEEK 5
LEC NOTE 5
Environment auditing
PESTEL analysis
PESTLE stands for - Political, Economic, Sociological, Technological, Legal, Environmental.
PESTLE analysis is in effect an audit of an organizations environmental influences with the
purpose of using this information to guide strategic decision-making. The assumption is that if
the organization is able to audit its current environment and assess potential changes, it will be
better placed than its competitors to respond to changes.
The concept
To help make decisions and to plan for future events, organizations need to understand the wider
meso-economic and macro-economic environments in which they operate. (The mesoeconomic environment is the one in which we operate and have limited influence or impact, the
macro environment includes all factors that influence an organization but are out of its direct
control). An organization on its own cannot affect these factors, nor can these factors directly
affect the profitability of an organization. But by understanding these environments, it is possible
to take the advantage to maximize the opportunities and minimize the threats to the organization.
Conducting a strategic analysis entails scanning these economic environments to detect and
understand the broad, long term trends.
A PESTLE analysis is a useful tool for understanding the big picture of the environment in
which an organization is operating. Specifically a PESTLE analysis is a useful tool for
understanding risks associated with market (the need for a product or service) growth or decline,
and as such the position, potential and direction for an individual business or organization.
A PESTLE analysis is often used as a generic 'orientation' tool, finding out where an
organization or product is in the context of what is happening outside that will at some point
affect what is happening inside an organization. The six elements form a framework for
reviewing a situation, and can also be used to review a strategy or position, direction of a
company, a marketing proposition, or idea.
Completing a PESTLE analysis can be a simple or complex process. It all depends how thorough
you need to be. It is a good subject for workshop sessions, as undertaking this activity with only
one perspective (that is, from just one persons view) can be time consuming and miss many
critical factors. We all see things differently and harnessing the knowledge of several people will
ensure the process is robust and meaningful.
CHAMARA DE ZOYSA
Page 1 of 4
Batch No.7
BTECH HND/BS
WEEK 5
LEC NOTE 5
The PESTLE model

The PESTLE model provides users with a series of headings under which users can brainstorm
or research key factors:
Political: what is happening politically in the environment in which you operate,

including areas such as tax policy, employment laws, environmental regulations,
trade restrictions and reform, tariffs and political stability.
Economic: what is happening within the economy, for example; economic growth/
decline, interest rates, exchange rates and inflation rate, wage rates, minimum
wage, working hours, unemployment (local and national), credit availability, cost
of living, etc.
Sociological: what is occurring socially in the markets in which you operate or
expect to operate, cultural norms and expectations, health consciousness,
population growth rate, age distribution, career attitudes, emphasis on safety, global
warming.
Technological: what is happening technology-wise which can impact what you do,
technology is leaping every two years, how will this impact your products or
services, things that were not possible five years ago are now mainstream, for
example mobile phone technology, web 2.0, blogs, social networking websites.
New technologies are continually being developed and the rate of change itself is
increasing. There are also changes to barriers to entry in given markets, and
changes to financial decisions like outsourcing and insourcing.
Legal: what is happening with changes to legislation. This may impact
employment, access to materials, quotas, resources, imports/ exports, taxation etc.
Environmental: what is happening with respect to ecological and environmental
aspects. Many of these factors will be economic or social in nature.
CHAMARA DE ZOYSA
Page 2 of 4
Batch No.7
BTECH HND/BS
WEEK 5
LEC NOTE 5
Porters 5 force analysis:

Five Forces Analysis helps the marketer to contrast a competitive
environment. It has similarities with other tools for environmental audit,
such as PEST analysis, but tends to focus on the single, stand alone, business
or SBU (Strategic Business Unit) rather than a single product or range of
products. For example, Dell would analyze the market for Business
Computers i.e. one of its SBUs.
Five forces analysis looks at five key areas namely the threat of entry, the
power of buyers, the power of suppliers, the threat of substitutes, and
competitive rivalry.
The threat of entry.

*
Economies of scale e.g. the benefits associated with bulk purchasing.
The high or low cost of entry e.g. how much will it cost for the latest technology?
Ease of access to distribution channels e.g. Do our competitors have

the distribution channels sewn up?
Cost advantages not related to the size of the company e.g. personal
contacts
or knowledge that larger companies do not own or
learning curve effects.
Will competitors retaliate?
Government action e.g. will new laws be introduced that will weaken
our competitive position?
How important is differentiation? E.g. The Champagne brand cannot

be copied. This desensitizes the influence of the environment.
CHAMARA DE ZOYSA
Page 3 of 4
Batch No.7
BTECH HND/BS
WEEK 5
LEC NOTE 5
The power of buyers.

*
This is high where there a few, large players in a market e.g. the large
grocery chains.
If there are a large number of undifferentiated, small suppliers e.g.

small farming businesses supplying the large grocery chains.
The cost of switching between suppliers is low e.g. from one fleet
supplier of trucks to another.
The power of suppliers.

*
The power of suppliers tends to be a reversal of the power of buyers.
Where the switching costs are high e.g. switching from one software
supplier to another.
Power is high where the brand is powerful e.g. Cadillac, Pizza Hut,
Microsoft.
There is a possibility of the supplier integrating forward e.g. Brewers

buying bars.
Customers are fragmented (not in clusters) so that they have little

bargaining power e.g. Gas/Petrol stations in remote places.
The threat of substitutes

*
Where there is product-for-product substitution e.g. email for fax

where there is substitution of need e.g. better toothpaste reduces the
need for dentists.
Where there is generic substitution (competing for the currency in

your pocket) e.g. Video suppliers compete with travel companies.
We could always do without e.g. cigarettes.
Competitive Rivalry
*
This is most likely to be high where entry is likely; there is the threat
of substitute products, and suppliers and buyers in the market attempt
to control. This is why it is always seen in the center of the diagram.
CHAMARA DE ZOYSA
Page 4 of 4
Batch No.7

Environment Auditing: PESTEL Analysis

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BTECH HND/BS

The PESTLE model

Political: what is happening politically in the environment in which you operate,

Porters 5 force analysis:

The threat of entry.

Economies of scale e.g. the benefits associated with bulk purchasing.

Ease of access to distribution channels e.g. Do our competitors have

Will competitors retaliate?

How important is differentiation? E.g. The Champagne brand cannot

The power of buyers.

If there are a large number of undifferentiated, small suppliers e.g.

The power of suppliers.

The power of suppliers tends to be a reversal of the power of buyers.

There is a possibility of the supplier integrating forward e.g. Brewers

Customers are fragmented (not in clusters) so that they have little

The threat of substitutes

Where there is product-for-product substitution e.g. email for fax

Where there is generic substitution (competing for the currency in

We could always do without e.g. cigarettes.

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